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Episode Summary

TheNextCMO’s latest podcast is with Dan Faulkner, the CTO of Plannuh. Before being employee #1 at Plannuh, Dan worked at Nuance Communications as the Senior VP and general manager. During his 13 year tenure, Dan focused on the VP & GM voice-to-text space leading product management and strategy for global enterprise business. In this episode, we cover the importance for marketers to understand and build a relationship with finance, new terminology; the law of small change and budget burn rate, and the consequences of a marketer if they are not on top of their numbers. Dan Faulkner - https://www.linkedin.com/in/danielfaulkner/

Transcript

Kelsey Krapf 0:14 Welcome to the official podcast of TheNextCMO hosted by Plannuh. My name is Kelsey Krapf and I'm the senior marketing manager.

Peter Mahoney 0:22 And I'm Peter Mahoney, and I'm the founder and CEO of Plannuh.

Kelsey Krapf 0:27 For this week we have Dan Faulkner our very own CTO of Plannuh. As our guest. Dan just recently wrote a blog series on managing budget and financial fundamentals every marketer needs to know, we thought it'd be a great idea to have them on this episode to discuss a bit further around budget management. Welcome, Dan. How's your day going? so far?

Dan Faulkner 0:47 It's going great. Thanks, Kelsey. How are you?

Kelsey Krapf 0:50 Doing well, doing well, Happy Thursday or whatever day it is? Yeah, well, I'm just wanted to, you know, ask a quick question. So you wrote This this great blog series. You know, why is it important for marketers to understand finance at all? Isn't that what finance is for?

Dan Faulkner 1:10 It is what finance is for? Yes, but marketers need to understand it as well.

Peter Mahoney 1:14 I hope no finance people are listening to this. That's what finance is for

Dan Faulkner 1:19 finances for understanding finance.

Stop me if it's getting technical.

It is important for marketers to understand finance, not least because they're typically dealing with the largest discretionary budget in the company. So they're, they're responsible for fairly large amounts of money. And across a marketing team, almost everybody is spending money. So it's very difficult to keep track of just what you are spending as an individual. You have to know what everybody's spending and you need to know more importantly, not just what they're spending, but when it's hitting the budget. And that's important because you've got to know as accurately as possible at all times what you've spent and how much you've got left to spend. And in order to do that, then ideally as many people in marketing as possible, but at least the CMO and some of the CMOS, core team members need to really understand how that works for that particular company.

Peter Mahoney 2:22 Yeah. Danna, I think we've been surprised by the diversity of understanding, let me put it that way of financial principles when we talk to marketing teams. And the interesting thing is that you often see the leaders in marketing pretty fluid, obviously, in financial matters. And I think you'll see that more and more as more CMOS are being put in a position where they have to act more like the general manager of marketing. So as a result, they tend to be in if they're senior executives of any company, they tend to be really well versed and adept. When it comes to understanding financial principles, that the trick is, of course, when you start to scaffold that responsibility down to your organization. And one of the things I know that you and I run into a lot is people who maybe came up from a different path in the marketing organization where they haven't had to have that responsibility before. So that that's why I think people really resonated with this blog post that you wrote in is that there's there hasn't been, there's no core curriculum that requires financial understanding, to to be a marketing leader these days, and there probably should be at some level, would you say?

Dan Faulkner 3:39 Yeah, I think that's exactly right. And it's a nice way of phrasing it is, is there shouldn't be a kind of a core curriculum, these sort of a small set of principles that if you understand them, no matter what level you are, what particular role you have in marketing, you're just going to be more effective in in managing your budget. And what I mean by that is not only spending it, but also reporting on it either, you know, up through your organization or if you're the CMO, discussing in a credible way with your counterparts on the executive team, where the budgets going and and what it's been spent on and how much is left and some of those kind of fundamental questions.

Peter Mahoney 4:20 It's so when you came up with the the approach to this article that you wrote, recently, you define these sort of key financial principles that you think everyone should understand. Why don't you just quickly explain what those principles are for for the bulk of our listeners?

Dan Faulkner 4:40 That's both of them not including us, right?

Peter Mahoney 4:42 That's right. My mom listens.

Dan Faulkner 4:47 So sure, the one of the most important ones is are you operating on a cash based accounting system or an accrual based accounting system? Most people are going to be operating on an accrual based system. But it's really important to know and even if you are operating on an accrual based system, your particular company may have some idiosyncrasies. So it's not one size fits all. But basically what that tells you is when you incur an expense, when's it really taken out of your budget? And sometimes it's counterintuitive. So it's good to understand that. Another really important thing to understand is periodically, the company's going to say, you know, if you haven't spent that money, we're taking it back. You can't spend it anymore. And for some companies that happens, just on an annual basis, do you have a fiscal year? That's pretty normal. Other companies, particularly publicly traded companies may actually have kind of hard limits at the end of each quarter. So they may say, if you haven't spent your q1 budget, we'll take the difference. It's really important that you know that and you can probably see that it's very important that you understand that, especially if you have an across cased, an accrual based accounting system. And expenses may be taken out of your budget when you're not expecting them to.

Peter Mahoney 6:15 Yeah, the IDN. We ran into this a lot. When you and I work together last where there, there are soft lines between months and hard lines between quarters. And that's for a reason. Obviously, the reason there's a hard line between quarters is that a public company especially needs to report out on their financial performance and they need to project and provide guidance of what their financial performance will be before the end of the period. So as a result, they have to have this fairly strict line of when you can stop and start spending or otherwise your financial results are going to be often and I can tell you as a marketer, you don't want to be the depart meant, that makes a public company miss the guidance that they've that they've given to, to to the street that that would be a bad thing. And the good thing is you'll probably have extra free time when when you're done with that.

Dan Faulkner 7:15 Now, you don't want to do that. But you also don't want to fall into the trap on the other side of that coin, which is thinking that under spending is a virtue. What you should really be trying to do is spend 100% of your budget on time. That's that's the goal in budget management.

Peter Mahoney 7:33 Completely agree, Dan, and I think that's something that is, I think that's something that is missed by a lot of people. The, the idea that, that they should, their job should be to spend 100% of the budget that is given to them, directed at the objectives that they're trying to achieve. With the money, it's not randomly, right, but it should be their job is to get the maximum possible result out of the budget that's been delivered to them.

Dan Faulkner 8:10 Yes, absolutely. And, and I think that's something we'll probably come to later is is kind of a metric you can track to try and make sure that you are set up and you can forecast that you are going to use the hundred percent of your budget. And one of the other principles that's very important, sort of at a fundamental level is what we call the life cycle of an expense. There are certain expenses that are very predictable. So if you're doing a big trade show, you can predict pretty accurately the big expenses there. So how much you're going to spend on travel, how much your hotel rooms will cost, the conference room, your guest speaker that's very predictable, and you know, a long way in advance how how those expenses are going to hit your budget. That's one type and you should be able to plan those. And then they become committed as you sign contracts. So even if you haven't yet received value for a particular service or you haven't actually gone and stayed in that hotel or run your particular event, you may have signed a contract. So you can't really back out of that that budgets as good as gone, then you're charged. So the event happens you get your your bill, you're invoiced, still doesn't mean that it's necessarily come out of your budget you've received an invoice is not the same as its hit your budget. And then eventually it works its way through your accounting system and it's reconciled. That's when you figure out where did it really come come out of which part of my budget, did it really come out of you know which month or which quarter? And that's the life cycle for very predictable expenses. Now mixed in with all of that you're going to have short term expenses. So incidental costs, like taxi rides, things that show up on credit cards that just hit your budget right away. And you might even get kind of sneak expenses, sneak attack expenses, where something's been given to marketing from some other department and you weren't expecting that to come in. And those you can't really do much about because they're closed, and they've hit your budget by the time you discover that they even exist. So understanding the different types of expenses, and the different life cycles of them will also help you manage your budget better.

Peter Mahoney 10:30 Yeah, that that makes a lot of sense, Dan, and I think the thing that sometimes people mix up is the the idea of how a vendor being paid relates to all of this. So when where does that matter? And in most cases, it just doesn't, right. I mean, obviously you want your vendors to be paid. But in it some of the confusion comes with the timing and the lifecycle of an expense is That the the accounting, so the accounting for the expense. So, when the the value is derived, the time period within which the value is derived might be completely different from when the cash when it when the cash is paid out to the vendor that can happen 120 days later sometimes obviously, so it's it can be quite disconnected at the end of the day.

Dan Faulkner 11:26 Absolutely. And depending on you know, the type of the campaign you're running, you might have some expenses for a given campaign come out of your budget in you know, month one and other expenses for the same campaign not hit your budget till till month three. So for example, if you're doing an advertising campaign, and you do kind of creative and positioning work, you'll pay for that as it's completed because you've now got creative copy that creative and copy that you can use and that you won't actually incur the cost for the advertising until you run out. The advertisements later on, so they can be separate as well, even if they're in the same campaign.

Peter Mahoney 12:05 Yeah, I should highlight to that there are a nice little charts that you've developed to to explain some of the timing here. Well, we'll have in the show notes, a link to the blog article that you wrote. So if you want to follow along with that, it's probably a little bit easier to understand all that all the terminology. Speaking of terminology, there are a couple of new things that you introduced. So two things, the law of small change and budget burn rate. Can you explain those terms to the audience, Dan?

Dan Faulkner 12:37 Sure, I can. The law of small change. Actually, there's a there's a blog about that as well, a separate one. And it was something that I borrowed from my childhood we, my dad came home from work he used to put his small change into a jar and when it was full, we've kind of counted all out and we were always pleasantly surprised to find out that you know, There was enough for a vacation or like a long weekend away somewhere. So it was kind of exciting to think well, how did all of those, you know, little loose coins turn into such a big amount. And that analogy applies to marketing budgets. All these campaigns and anticipated expenses that we may have reserved budget for, but we don't completely spend, and then we don't go back and scoop up that budget, and make sure that we've we were tracking all the small pockets of change scattered throughout the budget. They add up to a lot, and they can lead to kind of chronic underspend. The reason they're hard to track is because you can't really see them in a spreadsheet. So we think it's really important to have a system in place that a identifies where you've got the spending campaigns or individual expenses, and B lets you roll them forward and and use them so that's that's law of small change.

Peter Mahoney 14:00 Yeah, in you know, I call that the the Brewster's millions feature that scoops all that up. And for everyone who isn't as old as me, or who has slightly less awful taste in in movies. That's the Richard Pryor movie where he finds some way to divert little bits of pennies in a bank and ends up buying himself a Ferrari or something like that. So, so it's it's a very similar concept. And it's important because sometimes these small chunks can add up to one aren't so small. If you if you're planning on spending $50,000 for something and you spend $42,000, you've got $8,000 to go spend somewhere else and you have to recapture that and put it back and put it to work in your budget. So I think that's an important thing. So budget burn rate, I think is a really interesting one, related to this conversation, especially because it's in my mind a really good tool to use To see how you're doing progressing against your target of trying to do good job spending within the time period, the budget that's allocated to you.

Dan Faulkner 15:10 Yeah, so the idea here was, at the beginning of the year we, we have our budget, we know that anything we haven't spent at the end of the fiscal year is going to go away. And implicitly, we have some notion of capacity, you will have built a budget and you should have built a team whether that's FTS or a combination of FTS and contractors and consultants who are actually able to consume that budget 100% of that budget within the fiscal year, there might be some flex, you know, in certain months as you do more activities, so some will be, you know, higher spend than others. But once we kind of have that premise, we can calculate Well, okay, so what should you be spending on average per day and if we track back Against reality, we get a pretty good indicator of your risk. And if you start to fall behind what your your budget burn rate should be, and you do that for a few months, what you can find is that your budget starts to run away from you. What that means is you're approaching the wall of the end of the year. And the amount of money that you have to spend starts to exceed your team's capacity to spend in a sensible way towards your goals. And the behavior that that engender is is kind of panic buying you'll you'll start to just spend the money to consume the budget so you don't lose the budget next year. But it means that you're probably going to miss your marketing goals. And we believe that the budget burn rate tracking that and as soon as it starts to either fall behind or go ahead, you can take corrective steps early.

Peter Mahoney 16:54 Yeah, absolutely. In fact, even within a quarter, so if you're if you're inside a quarter As we had been in the past when we work together, and we still work together, I think, but don't we do the last time we work together This is he can't even call this work. We're having so much fun. So the last time we work together, when when we had hard lines around the quarterly boundaries, you'd often see the first month and second month be pretty light when it comes to spending and then it was a big hockey stick in the in the last month of the quarter. So there's sort of little there are these four, there were four sort of curves that you had to manage to. But then of course, there's if you're focused on your annual number, it can get really way behind you. And we see this a lot in. In some, some companies as they're coming on board with planet for the first time they've really struggled with this. And some of it is that they keep hedging their bets and the hedges keep adding up over time. And because they don't have good visibility. Then all of a sudden, they're like you said they're either they're either not spending the money, which means next year, their baseline is going to be lower from what they spent. More importantly, they're probably not meeting their goals in a way that they could have because they're not putting that money to work. And then some people decide, you know, everyone's going to get a pony or whatever. And, and that's just bad spending. So that doesn't make a lot of sense. I completely agree. So, talk, talk about the consequences. So what happens? What happens if you're not staying on top of your numbers? And I think more fundamentally, more than a top stand on top of your numbers, if you don't really understand some of these key key financial concepts and principles that are important for marketers.

Dan Faulkner 18:53 Yeah, I mean, so there's some execution and then there's some in the in the outcomes. So from an execution perspective, if you notice Have good visibility into numbers, meaning you don't understand what you spend when it's going to hit your budget. You don't know what you've got to spend now. And that means you can't make you can't be decisive. You can't say yes, let's go and invest in this program. Now this thing's going well, we have budget left, let's spend a bit more in it. And so what people tend to do is slow down, they'll delay their decisions, which means they're delaying their programs that has two big consequences. The first is they're not actually executing the campaigns they need to to achieve their marketing results. The second is that increase in the likelihood that they're going to have to do that panic buying rush spending to use up their budget at the end. And when they do that, either of those, so if they if they land in either of those situations where they've said, Okay, we're just not going to spend all of our budget or they do the panic spending.

What we discover Is

that their counterparts on the executive team lose faith in them, they're like, okay, so you spent all your money but you didn't hit your targets that's not good. Or they say, it looks like your team actually doesn't even have the wherewithal to spend the money. We should right size the budget and calibrate the budget that you have to the capacity that you have in the team. So it normally ends up with kind of a loss of credibility, a reduction in budget, and it can really be a tough thing to get out from under once that starts to happen.

Kelsey Krapf 20:37 I guess we want to leave it you know, on a little bit more of a positive note. And the reason why, you know, we have this podcast is to give advice to CMOS and the ones that want to become future CMOS and fill the shoes and actually perform well. So what advice would you give to a future cmo that, you know should be understanding finance just as they understand marketing

Dan Faulkner 21:01 Yeah, there's definitely some very practical and achievable steps that anyone who wants to to get on top of this can take. So the first step is just educate yourself on those, those fundamentals that Peter and I have talked about. They, they can sometimes seem intimidating when you hear people using financial vernacular that you might not be used to. But they're really not. They're quite simple concepts. And as Peter mentioned, in the blogs, we've got, you know, diagrams that show the differences between them. So you can you can follow, sort of follow up and read those those will help day to day, make friends with finance, find someone in finance, who's, you know, who, who's interested in the business and interested in what you're trying to achieve in marketing. But I've always found that, you know, there are colleagues in the finance team who are really willing to spend time with you, you know, have a lunch or just, you know, once every couple of weeks, review things and tell you where you are and how you're doing and you'll pick Those things up really, really quickly. So it's important to know, but you can definitely find out quite quickly.

Peter Mahoney 22:06 It Dan, I, I can't emphasize that last point enough. I think having a strong relationship with finances is critical in it. I know the times when I was most productive as a marketing leader is when I had just a really tight connection with finance. It reminds me of the Gartner came out with a report earlier this year, talking about the biggest inhibitors for marketing, for marketers, to their success. And if you look 10 years ago, marketers would have put it at the top inhibitor of their success. Now they're defined as one of the top enablers of their success because they found their love, right, they're connected and everyone's working together. Well. Now, fast forward to today, and those same marketers identify finances one of the biggest inhibitors to their success, and it's a it's a huge problem and some of it comes from just a lack of understanding and and not having a common language. The problem is that finance people don't understand marketing enough marketing people don't understand finance enough. So if you can forge a relationship and one of the things I found has been really helpful is explain to your finance business partner, what you're trying to do and why in help them understand the marketing theory behind what you're doing, you know, what, why this matters to the business. And, and, one, they'll appreciate it, they'll have a better understanding. And it'll be much easier for for you to have a clear up to date view of what's going on with the business and, and I think having an advocate in a finance organization can only be helpful for you. So I think that's great advice.

Kelsey Krapf 23:52 Thanks so much for coming on. Dan is going to wrap it up for this episode. We really appreciate your time. And it was such pleasure talking to you. So make sure to follow TheNextCMO and Plannuh on Twitter and LinkedIn and if you have any ideas for topics or guests, you can email them at thenextcmo@plannuh.com Have a great day everyone and stay safe.